Client Alert: Policyholders Developing AI-Based Bad Faith Claims (Insurance Law Alert)
(Article from Insurance Law Alert, July/August 2026)
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Policyholders are actively developing breach of contract and “bad faith” claims based on the alleged use of artificial intelligence by insurers. For instance, a policyholder may argue that an insurance policy or insurer marketing material expressly or implicitly indicated that underwriting, coverage or valuation determinations would be made by human professionals (e.g., doctors, actuaries, claims handlers), and that the insurer has improperly delegated the determinations to AI. Additionally, policyholders may argue that the AI model being used to assist the insurer in its coverage or valuation determinations inappropriately advantages the insurer over policyholder interests. Policyholders attempt to develop these theories in discovery by seeking insurer documents regarding the determination to use AI and any associated cost-benefit analysis; the development of the AI including training sets; and documents concerning the ongoing usage of the AI. Insurers are advised to consider the potential for these claims when developing, rolling out, and utilizing AI models to assist in underwriting and claims-handling. Careful planning and documenting by insurers can help minimize exposure to this new litigation tactic.